My sister’s wedding is fast approaching, and I have been busy gathering something old (pictures of our grandparents in a bouquet locket), something new (shoes!), something borrowed (the veil I wore at my own wedding), and something blue (I still have 6 weeks to figure this out).
Observing superstitions are vital for ensuring wedded bliss, but before my sister walks down the aisle, I do feel obligated, as an estate planning professional, to point out some planning considerations that may also ensure her happiness.
Before the Wedding Day
Prenuptial agreements present a unique opportunity for a couple to agree in advance precisely how certain important issues will be resolved should those issues arise. Couples may be more inclined to come up with fair and equitable solutions while they are still in the courting phase of their relationship.
Prenuptial agreements must conform to state law, and attorneys specializing in family law are typically engaged to draft them. In this regard, an estate planning professional can add a valuable and unique perspective, particularly for an individual who is part of a wealthy family or who otherwise has significantly greater wealth than the soon-to-be-spouse.
A prenuptial agreement should consider the following estate planning issues:
- To the extent that an individual is a beneficiary of a trust established by a third party, the estate planner should review the prenuptial agreement and the trust instrument to confirm the trust assets are protected from future claims by the new spouse.
- The planner should confirm that the prenuptial agreement correctly identifies non-marital property from bequests, gifts and/or other familial transfers, in order to permit these items to be kept separate from marital property.
- Under recent revisions to the Internal Revenue Code and related regulations, a surviving spouse may be able to use a deceased spouse’s unused lifetime exclusion to make gifts (a “portability election”). This opportunity is only available if a federal estate tax return for the deceased spouse is filed. The surviving spouse is the only person who can make the portability election and the only person with an interest in the value of portability. Therefore, a prenuptial agreement should specify whether the surviving spouse has the right to require that a federal estate tax return be filed for a deceased spouse solely for the purposes of preserving portability. The prenuptial agreement should also clarify who will pay for the preparation of the federal estate tax return.
After the “I Do’s”
Once all the wedding presents have been unwrapped and put away, and wedded bliss becomes a reality, the estate planning advisor’s role is not yet complete, because every comprehensive estate plan should include efforts to assist the newly married couple actually adhere to their plan.
At this stage, an estate planner should work with the couple to:
- Keep non-marital assets separate, as agreed under the prenuptial agreement.
- To the extent that either spouse is a beneficiary under a trust established by a third party, the estate planner should determine and advise the trustee (to the extent practicable), to avoid making trust distributions in a manner that could give rise to a future claim by the spouse based on an expectation of entitlement to either trust income or principal distributions.
- Marital trusts are an essential strategy that facilitates flexibility in planning. These trusts need to be structured in a way that does not circumvent the objectives of the prenuptial agreement.
- A newly married couple should generally update their wills and any other estate planning documents to include each other and ensure their plans conform to their prenuptial agreement and state law.
- The couple will also likely need additional updates after the birth and/or adoption of any children.
Divorce: If the Honeymoon Ends
Despite thoughtful planning and best intentions, it is a fact that just about 50% of all marriages in the United States end in divorce. The rate is higher for second and subsequent marriages, according to the publication Psychology Today.
When the divorcing couple seeks the recommendations of their advisors to develop a plan for financially parting ways, a trusted advisor with estate planning expertise can also provide important assistance:
- An individual who has decided to divorce may need to take advantage of certain planning opportunities before even announcing the decision to the spouse. Upon deciding to divorce, an individual may wish to:
- Change a fiduciary in estate planning documents, such as a will, trust, and/or powers of attorney.
- Review beneficiary designations. (Note that tax-qualified plans will require spousal consent of changes to beneficiary designations; whereas non-qualified plans will not typically require spousal consent.)
- Evaluate life insurance policies and determine whether more life insurance may be needed.
- An advisor needs to consider whether an individual made, or plans to make any fraudulent conveyances immediately before or during divorce proceedings. These can legally hamper settlement and cause additional problems with the soon-to-be-ex. The existence of such conveyances can be highly problematic for all parties.
- Consider and address any gift tax issues.
- Divorcing spouses may wish to “split” gifts in their final year of marriage for federal gift tax purposes. Any gifts made during that year but before the divorce becomes final are eligible to be split, provided that neither spouse remarries before the end of the tax year.
- Transfers between spouses incident to divorce may not be considered “gifts” and/or may have federal income tax consequences that should be considered.
- Update wills, revocable trusts, and/or other estate planning documents.
- Consider whether any trusts need to be decanted.
- Ensure that divorce obligations are honored in planning documents.
- Under the tax law changes enacted at the end of 2017, alimony payments based on divorce settlement agreements executed prior to December 31, 2018 are tax deductible to the payor spouse but constitute taxable income to the payee spouse. For agreements executed after December 31, 2018, these deductibility/includability provisions will not apply.
- If any property is not retitled following a divorce, with the result that the ex-spouses continue to own property together, the advisor should consider how joint ownership affects the estate plan and whether any changes are required.
‘Til Death Do Us Part
Death terminates a divorce proceeding and, depending on state laws, may entitle the surviving spouse to inherit as though the couple had continued to be married. In the event a death could precede the conclusion of the divorce proceedings, an advisor may seek to finalize the divorce and reserve the right to finalize the terms afterwards.
While I am fairly confident that my sister appreciated the food processor I gave her at her bridal shower, I believe that the planning advice I offered was perhaps, even more critical. Receiving this type of advice, through sensible planning strategies that fit her specific situation, should be important to her and ought to be equally important for the estimated 2.3 million people who will marry in the U.S. during 2018.
As for me, the quest for “something blue” continues! Maybe I should just tie a blue ribbon around this article and give it to my sister to carry on her wedding day?
For additional information, please contact Joy Matak, National Trusts and Estates Practice Co-Leader for CohnReznick, at [email protected]. Click here to learn more about CohnReznick’s National Trust and Estates Practice.
This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.